How to calculate capital gains and tax liability on inherited property

Shobhana has inherited a non-agricultural plot worth Rs 10 lakh from her late grandmother. The plot was bought before 1980. What are the tax implications for Shobhana? Will she have to pay tax on her inheritance, considering the plot will be transferred in her name? 

What if she wants to sell the property? Will the proceeds be fully tax-exempt, since she only inherited it and did not acquire it? Considering that no cost of acquisition is available, how will she compute the gains for taxation purposes? 

There is no tax liability for Shobhana at the time of inheritance. However, any profits made on the sale of inherited land are taxable as capital gains. This implies that should Shobhana decide to sell it, capital gain from sale of the inherited property will be fully taxable in her hands. Therefore, it is important that she secures the documents substantiating the inheritance of land. 

Having said that, the period of holding will be considered from the date of purchase by her grandmother. The cost at which her grandmother bought the house prior to 1980 shall be considered as cost of acquisition. But since the cost of the land is not available and the same has been acquired before 1 April 1981, fair market value of the land as on 1 April 1981 can be considered as the cost of acquisition. For ascertaining the same, Shobhana must engage the services of a registered valuer. 

The LTCG shall be computed as the difference between net sale proceeds and indexation cost of acquisition. For indexation, the cost of acquisition should be adjusted by applying the cost inflation index (CII). CII for 1981-82 and the financial year in which Shobhana sells the property will be considered. 

The year of inheritance has no importance in the calculation of long-term capital gains. She can also add the costs incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, property valuer etc. while computing the cost of acquisition. 

In case there are any residual capital gains, Shobhana may have to either pay tax on it at the rate of 20% or save capital gains tax by buying specified bonds u/s 54EC. 

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) 

Source:-The Economic Times